After surviving the immediate aftermath of Thursday's rise in the German discount rate relatively unscathed, the financial markets took fright on Friday. Some pounds 10bn was wiped off London share values and the pound lost 1.5 pfennigs to close under DM2.85, more than 10 pfennigs adrift of its central rate in the exchange rate mechanism.
City analysts fear the nervousness will persist, but they fall short of predicting a full-blown sterling crisis. 'The markets have never really been prepared to take on the Bank of England while we have been in the ERM,' said David Simmonds, economist at Midland Montagu.
The markets' jitters will not be eased this morning by the Confederation of British Industry's latest distributive trades survey, which suggests that the small post-election revival in high street spending has 'fizzled out'.
For only the second time in 12 months, high street spending last month was more depressed than a year earlier, retailers said. Some 42 per cent reported that sales were down, compared with 39 per cent reporting a rise.
The CBI's findings do not bode well for the official retail sales figures, due on Wednesday. The rise in retail sales volume between May and June is forecast to have slowed to 0.1 per cent from 0.3 per cent a month earlier. The survey suggested that sales of DIY, electrical and household goods were particularly depressed because of the stagnant housing market.
Retailers have sharply reduced the amount they order from suppliers. Some 50 per cent more retailers cut orders over the past 12 months than raised them, the most depressed figure this year. Nigel Whittaker, chairman of the CBI distributive trades panel, said the fall in orders could hit the healthy year-on-year sales growth currently enjoyed by wholesalers.
The depressed mood is expected to persist. 'Retailers expect sales to remain broadly unchanged in July, on an annual basis, and still very poor for the time of year,' said Mr Whittaker. July expectations are the most pessimistic for six months.
If Wednesday's figures show a fall in June retail sales, it will deepen City fears that the economy was in recession for an eighth successive quarter between April and June.
But there is a glimmer of hope from the latest quarterly survey by the British Chambers of Commerce, due this week. The London survey - expected to be one of the most downbeat - suggests the capital's economy was broadly flat in the second quarter.
But prospects for recovery are further imperilled by the threat of widespread mortgage rate rises, following Cheltenham & Gloucester Building Society's 0.24 per cent hike, announced on Friday. C&G said its move was aimed at allowing the society to offer higher rates to savers to compete with the National Savings First Option bond, recently launched by the Government.
Abbey National, the building society turned bank, said the attractive rates on National Savings had put intense pressure on its mortgage rates. 'It has made life extremely difficult for us in an already harsh environment.'
The Treasury refused to speculate on whether the bond might be withdrawn. 'National Savings rates are always under review in light of market developments,' a spokesman said.